U.S. shale mergers accelerate, as Pioneer-Parsley deal joins roster

In this news, we discuss the U.S. shale mergers accelerate, as Pioneer-Parsley deal joins roster.

HOUSTON / NEW YORK (Reuters) – Consolidation of the U.S. shale industry is accelerating, increasing pressure on oil and gas producers to gobble up smaller rivals, analysts said and leaders.

Pioneer Natural Resources Co, one of the largest independent shale operators, joined the ranks of negotiators on Tuesday announcing a low-premium $ 4.5 billion buyout of Parsley Energy Inc.

The coronavirus pandemic has reduced demand for oil and forced struggling shale producers to cut costs as they face a sub-optimal crude price of $ 40 a barrel, uncertain prospects and need to invest to keep production stable due to the rapid rate at which shale production is declining. Large global companies are unlikely to step in, so analysts expect the shrinking universe of notable producers to seek out trading partners.

“The universe of companies you can partner with is getting smaller by the day,” said Matthew Portillo, Managing Director of Tudor Investment Bank, Pickering, Holt & Co.

On Monday, Concho Resources Inc agreed to sell to ConocoPhillips for $ 9.7 billion. This follows Chevron Corp’s $ 4.2 billion purchase of Noble Energy this month and the all-stock, low-premium $ 2.6 billion purchase of rival WPX Energy Inc in September. European majors are avoiding further oil and gas purchases and Exxon Mobil Corp is cutting costs, making them unlikely candidates for a deal.

“Those who don’t have very strong balance sheets are trying to survive,” Concho Resources chief executive Tim Leach said in an interview on Monday when the Conoco deal was announced. Leach said companies with stronger balance sheets will buy weaker companies.

Investors are increasingly looking for companies with a market value of at least $ 5 billion, preferably those that pay dividends. While most large shale companies pay dividends, a Refinitiv Eikon index of U.S. oil and gas producers has lost 55% this year, compared to a 7.4% rise in the S&P 500.

“The outlook for small businesses in the sector has waned,” Portillo said.

Buyers could include Marathon Oil Corp, Apache Corp and EOG Resources Inc, while Cimarex Energy Co, PDC Energy Inc and Parsley are the main contenders for consolidation, Portillo said.

Financial buyers could become buyers, as many companies are heavily indebted.

“The banks are going to have to take over the companies and consolidate them into bigger companies,” said a shale executive, who did not believe many companies had balance sheets strong enough to acquire rivals.

Bankruptcies are up 21% so far this year among energy producers, according to law firm Haynes and Boone.

Even the combined companies “should still walk a tightrope” between trying to return capital to shareholders and spending to keep pumping out of steeply declining shale fields, said Andrew Dittmar, M&A analyst at Enverus.

Shale production rebounded during the summer after the first pandemic-induced lockdowns, but companies are investing less now. Shale production is expected to fall 123,000 barrels per day in November, the largest drop since May, according to figures from the US Department of Energy.

Transactions should increase cash flow, not add to debt and have small bonuses, said Jennifer Rowland, analyst at Edward Jones. “Any deal that requires significant cost savings or a higher oil price to justify the price paid will not be welcomed,” she said.

Reporting by Jennifer Hiller in Houston and David French and Devika Krishna Kumar in New York; Edited by Marguerita Choy

Original © Thomson Reuters

Originally posted 2020-10-21 01:46:11.

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